"It's often been observed that the first casualty of war is the truth. But that's a lie, too, in its way. The reality is that, for most wars to begin, the truth has to have been sacrificed a long time in advance." L. Neil Smith

06 April 2010

For Warren Mosler: A Primer on the Difference Between Honesty and Fraud

Warren Mosler is "an economist specializing in monetary policy and running for Senator Dodd's Senate seat in the November elections." He has written the following piece for the Huffington Post. He is so incredibly off the mark that I thought a bit of correction to that spin might help his thinking before he hits the campaign trail.

Mr. Mosler. I have been following this case closely. No one atGATA, or anyone else looking at the state of the regulatory climate in Washington and the quality and tarnished reputation of US markets, is complaining about the normal sort of trading that has been going on 'for thousands of years.' Most of the people with whom I have spoken and questioned are seasoned traders with a profound understanding of the commodity markets, and equity markets, and derivatives.

What many people are complaining about is fraud. In this case fraud can loosely be defined as doing something and then lying about it. Saying you did not do something, or disguising the nature of what you have been doing, can turn even a prima facie benign action into a fraud, depending on the intention and degree.

Many people around the world are not complaining that the US has lent out its gold, and the 'depositories are filled with paper,' which may some day be replaced by gold again. Although they do point out that it will be replaced at MUCH higher prices if their suspicions are correct. They are pointing out that government officials have said repeatedly that they have never lent it out in the first place but refuse to submit to audits and transparent accounting. And if it did occur, such lending may be of questionable legal status, which is why so many have denied it has occurred. Only the Congress can allow for the attachment of binding claims to sovereign assets. Have they? And if, in exercising some new presidential prerogative, the executive has done so, where is the public disclosure? Where is the law?

And further, in the case of commercial entities like the TBTF bullion banks JPM and HSBC, they are not complaining about short selling that is backed by physical metal, duly paid and accounted for. They are asking questions about what appear to be enormous naked short positions against silver, questionable ownership and claims to collateral, and naked shorting by banks using public funds and powerful influence over the regulators, with selling patterns indicating the intention of manipulating the price in order to gain from it. Sound familiar? It seems as though this has been the very basis of the US financial system since the repeal of Glass-Steagall.

Although your essay contains a number of factual errors, this does stand out as a particularly misleading statement:

"If you hold gold, lending it is a way to make extra money with very little risk."

Tell that to the miners like Barrick that took a multi-billion dollar bath on their hedge book. Derivatives and transactions involving naked shorting and selling the same thing multiple times are never, ever relatively riskless or easy. There is always the real risk of the mispricing of risk and miscalculation of probability, and counterparty failure, which at times can reach the point of becoming systemically risky, as we most recently have seen in the case of AIG et al. This is the story of all bubbles and bank runs. Reckless leverage and mispricing of risk.

Janet Tavakoli sounded the alarm that a short squeeze in gold could bring JPM and the banks to their knees, and risk the global markets again. JPM is dealing in trillions of derivatives exposure, with a leverage that is breath-taking. To dismiss the complaints and concerns about this is as reckless as some of the more outlandish assurances made by Greenspan,and then Bernanke, just prior to the credit crunch about the housing bubble.

In the end the Fed had Paulson come running to Congress pleading for $780 billion in taxpayer money with no strings attached, or face a complete and utter meltdown, riots and martial law. Oh well, and tra la, today is a new day, and back to gorging on risk again, eh? Not to worry.

At the end of the day its about honesty. And playing by the rules, the same rules for everyone. Its about justice, for all, and not just the powerful few. Not privatizing outlandish profits, and then socializing the mispricing of risk that is at the heart of the imbalances creating those outsized profits for a few in the first place. That is the very basis of fraud, and it requires secrecy and regulatory annulment to flourish.

"The very word 'secrecy' is repugnant in a free and open society; and we are as a people inherently and historically opposed to secret societies, to secret oaths, and to secret proceedings." John F. Kennedy

So thank you for the primer on gold lending. I see you have also read the primer about answering the question you wish you had been asked, rather than the one which you have been asked, in order to divert the conversation away from something you do not wish to discuss at all.

"Recently there have been a lot of what I believe to be gross misconceptions regarding the lending of gold and the absence of actual gold in various gold depositories. I'm writing this to clarify the lending process itself and the further ramifications of gold lending...

GATA (Gold Anti-Trust Action Committee) is complaining that the US govt. has lent gold and is therefore artificially keeping the price of gold lower than it would otherwise be. There is some truth to the idea that lending keeps spot gold prices lower than otherwise, as it keeps the spreads between spot an forward prices 'in line' but you can just as easily say that lenders selling spot and buying forward keep the forward prices higher than otherwise, giving gold producers a better price than otherwise.

So all that gold 'missing' from depositories is in the form of cash in the depositories and contracts to buy gold in the forward markets. And with gold being produced in large quantities for untold years into the future it's hard to say for sure that there isn't enough gold coming to market over that time to satisfy the demand. In fact, market theory would say the continuously changing clearing price means there is always exactly the right amount."

P.S. OMG, I cannot believe you resorted to the 'efficient market hypothesis' to attempt to prove that market fraud cannot exist, given all that has happened over the past ten years. That is truly embarrassing. Even Chris Dodd knows better than that. That prompted me to take a look at your CV. Word of advice. Peter Schiff is going to hammer you in the unlikely event you agree to debate him, unless you tighten up your thinking a bit.

"So all that gold 'missing' from depositories is in the form of cash in thedepositories and contracts to buy gold in the forward markets. And with goldbeing produced in large quantities for untold years into the future it's hard tosay for sure that there isn't enough gold coming to market over that time tosatisfy the demand. In fact, market theory would say the continuouslychanging clearing price means there is always exactly the right amount."

Like Daniel Drew said, "He who sells what isn't his'n, Must buy it back or go to prison." And it seems that lately the price the financiers have had to pay to buy it back, and make good on their promises, is punishingly higher than they have reserved, arranged or accounted for, especially when calculating their salaries and bonuses. This is the undercurrent of the frauds that have been perpetrated in this brave New World of innovative financing and dodgy derivatives and bonuses paid on the if-come. And the public is being forced to make up the difference and pay the price, for the good of the system, don'tcha know. And they are not even allowed to ask 'why?'

Madame Le Moderateur

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Need Little - Want Less - Love More

The Banks must be restrained, and the financial system reformed, with balance restored to the economy, before there can be any sustainable recovery.

"There is a vision to remake the world's economy according to the neo-liberal agenda, and to rule it with an 'iron rod' wielded by the US. It would be under the control, described as benevolent guidance, of an oligarchy of the self-proclaimed wisest and most powerful of the multinational elite. The key goal now is to subdue any effective competition, and to gain the full cooperation of the other major powers. They are testing their model of a confederation of nations under central control in Europe."Welcome to Jesse's Café Américain - These are personal observations about the economy and the markets. In providing information, I hope this allows you to make your own decisions in an informed manner, even if it is from learning by my mistakes, which are many. As a standing policy I never provide individual investment advice to anyone. I will only occasionally disclose my personal positions for purposes of illustration. Understand that my own circumstances could differ greatly from your own, and therefore what is suitable for me may not be suitable for you. My comments are intended to be reflection on general macro financial and economic events and trends.